Stocks fall as Fed uncertainty shifts back into focus. The S&P500 and the Dow Jones both fell 1.4% to 1,942 and 16,253 respectively. Equity gains were made in international markets on the possibility for further stimulus in Asia. The Nikkei in Japan increased 7.7% after Shinzo Abe said that corporate taxes would be cut. Indexes in Australia, South Korea, and Hong Kong also increased on the prospects for further stimulus in China. The Fed continues to face urges from the World Bank and the IMF to delay a hike in interest rates citing adverse affects on emerging markets. To counter these hopes, today’s JOLTS report today showed that job openings increased to 5.75MM in July which was higher than Junes 5.32MM reading. This supports the Fed’s view that the labor market will continue to improve marginally until optimal employment is reached. In spite of this data, yields stayed relatively flat with the two year unchanged at 0.74% and the 10 year down one basis point to 2.19%. The US dollar was weaker against the euro to $1.1201 as yields in Germany rose. Stronger against the Japanese yen to Y120.52 on the possibility for future easing in Japan, and stronger against the Canadian dollar to C$1.3246 (canadian dollars per usd) as the Bank of Canada kept interest rates unchanged.
Japan’s economic minister Akira Amari is considering a new round of fiscal stimulus this fall, anticipating that China’s slowdown will have ripple effects across Asia that will reach Japan. Japan’s 2Q GDP was recently revised to show that the economy contracted at an annualized rate of 1.2%. With domestic consumption low and exports potentially harmed by China, more stimulus will likely be required. Growth for the rest of the year is expected to be slow, as the upward revision to 2Q GDP was largely due to a buildup in inventories which may take a while to be drawn down.
The Fed continues to debate the merits and drawbacks of a potential rate rise later this month. Contributing to the case for rate hikes on the near end of expectations is the labor market. With the unemployment just about reaching what many consider to be optimal unemployment, that satisfies one requirement of the Fed’s dual mandate. The unemployment rate fell in August to 5.1%, and a JOLTS report today showed that there were 5.8MM job openings in July which shows that there is an increasing demand for workers. Inflation numbers continue to be depressed, however as demand for labor increases and jobs are added, wage pressures should pick up and push on prices. It seems logical that inflation should follow improvements in the labor market. The question remains whether or not the Fed will raise sooner due to the lagged effect of monetary policy or wait until there is more evidence that inflationary pressures exist.
Corporate bond sales resume after weeks of silence amid market turmoil. More than 12 issuances occurred today, including a $10Bn issuance from Gilead Sciences, and deals from Lowe’s and Marriott. Markets had been dead quiet since mid October as the slowdown in China shook financial markets around the world. $28bn of investment grade bonds were sold today which is the fourth most on record. 19 individual issuers is a record. Investment grade corporate debt has returned -0.63% this year. This may be in part to the use of proceeds, which have typically been to fund acquisitions or share repurchases, both of which are not ideal for bondholders. Acquisitions may raise a company’s debt levels and subsequently decrease the credit rating. Share repurchases are using money from bondholders to return money to stockholders.